article 4: the customer pyramid-creating and serving profitable customers

Question 1

customer pyramid

Answer 1

= a tool that enables the firm to utilize differences in customer profitability to manage for increased customer profitability

Question 2

4 necessary conditions for customer tiers to be used in company

Answer 2

1. Tiers have different and identifiable profiles= customers in different profitability tiers have different customer characteristics and demographics.
2. Customers in different tiers view service quality differently.
3. Different factors drive incidence and volume of new business across tiers= capture
   what actually drove customers to make purchases.
4. The profitability impact of improving service quality varies greatly in different
   customer tiers

Question 3

80/20 rule

Answer 3

= twenty percent of customers produce eighty percent of sales or value to the company

Question 4

4 levels of customer pyramid

Answer 4

1. Platinum tier= company’s most profitable customers, heavy product users, not overly price sensitive, willingness to invest and try new offerings, and committed to the firm.
2. Gold tier= profitability levels are not as high because they want price discounts and they are not as loyal to the firm despite being heavy users in the product category.
3. Iron tier= provide the volume needed to utilize the firm’s capacity but whose spending levels, loyalty, and profitability are not substantial enough for special treatment.
4. Lead tier= customers are costing the company money.

Question 5

when should a firm use customer pyramid

Answer 5

• When service resources, including employee time, are limited.
• When customers want different services or service levels.
• When customers are willing to pay for different levels of service.
• When customers define value in different ways, value is; low price, whatever the
  customer wants in a product, quality divided by price, or all that a customer gets for all
  the customer gives, like the price.
• Customers can be separated from each other= customers in different categories don’t
  know that tiers are viewed differently or treated differently.
• When service differentials can lead to upgrading customers to another level.
• When they can be accessed either as a group or individually

Question 6

customer alchemy

Answer 6

Customer alchemy= the art of turning less profitable customers into more profitable ones.
1. Turning gold into platinum= most important requirement is to fully understand them and their individual needs
strategies: Become a full-service provider; Provide outsourcing; Increase brand impact by line extensions; Create structural bonds; Offer service guarantees
2. Turning iron into gold
strategies:
Reduce the customer’s non-monetary costs of doing business; Add meaningful brand names; Become a customer expert through technology; Become a customer expert by leveraging intermediaries; Develop frequency programs; Create strong service recovery programs
3. Getting the lead out= allocate less effort to customers who are less valuable –> Lead customers
strategies:
Raise prices; Reduce costs; If both approaches are not effective, the wisest solution for the company is to try to free itself from them